Local Business
Tax – Settling a Shareholder Dispute under a Unanimous Shareholders Agreement is taxed as a Restrictive Covenant – Tax Court of Canada
Tax – Settling a Shareholder Dispute under a Unanimous Shareholders Agreement is taxed as a Restrictive Covenant – Tax Court of Canada
By Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr – President & Founder of CGL Strategic Business & Tax Advisors (CGLtax.ca)
From the WTF (Weird Tax Findings) department…
Consider this, you have three shareholders with a Unanimous Shareholder Agreement (USA) that says you can’t sell shares to a third party without consent of the other shareholders. Pretty standard stuff in agreements that I’ve seen.
Now if two of the shareholders want to sell, and one does not want to agree. What do you do?
In the Tax Court of Canada ruling in Pangea v The Queen (2018 TCC 158) that came out July 31, 2018, it became a little murkier.
The day-to-day common understanding of the Restrictive Covenant rules was that it was mainly for things like Non-Competition Agreements when selling a business, etc.
In this case, a shareholder that did not want to sell received an amount from the other shareholders. Basically, they paid him to go along with the sale of the shares and not exercise their right to veto the sale.
Now to a Canadian shareholder, such a payment could be also taxed as business income as an “inducement payment” so it really doesn’t matter the characterization. However, to a non-resident shareholder, inducement payments could be treaty exempt as business profits, but restrictive covenant payments are not. This was the case for Pangea, and why it went to court.
The commentary provided by the Tax Court of Canada however got me to thinking how far does this reach, and is there something else that could have been done?
You see, the agreement between the disputing shareholders does not have to be a formal agreement. The restrictive covenant rules say that it can be an “agreement”, “undertaking”, or “waiver of an advantage or right” whether legally enforceable OR NOT.
This wording makes me concerned.
So even if the other two shareholders, tied me up, held a gun to my head, and made me agree under duress to accept the payment and sell my shares, I would still be taxed as though I was a willing participant?
Now, this didn’t happen (I think) in this case, however, it begs the “what if” question, and brings a whole new meaning to “shotgun clause” in Unanimous Shareholder Agreements.
So what if the transaction would have been structured differently?
The interpretation by the tax court, although likely correct based on the extremely broad wording of the provisions, begs the question “what if” when viewing this scenario.
The questions below do not imply that they would have been viewed favourably by the CRA or the Tax Court Justice, but it makes me wonder how they would view it.
What if, instead of the amount being to agree, it was an outright sale of the right from Pangea to the other shareholders to veto the sale? Would the result be different? Would it be considered a disposition of property and exempted from the restrictive covenant rules? The Tax Court Justice hinted that this didn’t occur, so he does not have to consider it, but what would the ruling be if he did?
What if the purchaser agreed to pay more for the shares held by Pangea than the amount paid to other shareholders?
What if the other two shareholders assigned some of the sale proceeds directly to Pangea instead of receiving it first? Would it change the outcome?
If the two shareholders committed a criminal act (which they didn’t) in forcing Pangea to agree under duress, would the CRA and Tax Court still enforce the restrictive covenant rules? It appears that they could.
Unfortunately, this ruling raises more questions than answers with disagreeing shareholders tied to a Unanimous Shareholder Agreement trying to solve a dispute.
One can only pop some popcorn and stay tuned…
Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr is the President & Founder of CGL Strategic Business & Tax Advisors; member of CPA Alberta Tax Working Group advisory panel; and recently, moderator at the 2018 Canadian Tax Foundation Prairie Provinces Tax Conference in Saskatoon, SK; and Master of Ceremonies at the 2018 Canadian Association of Farm Advisors Alberta Update
The Downtown Business Association (DBA) Board of Directors has made the decision to wind down the Association’s operations at the end of 2025.
The Board determined that the Association is no longer able to operate sustainably under the financial framework available for 2026. After exploring all reasonable alternatives, the Board concluded that it could not continue without reducing services to a level that would no longer provide meaningful value to levy-paying businesses.
The DBA does not receive any operating funding from City Hall in a regular year, all funds raised are through Business Improvement Area Levy that consists of a mandatory levy placed on all businesses operating within the Business Improvement Area. These funds are legislated under the Municipal
Government Act, to be used to promote the Business Improvement Area, which is achieved through marketing and event initiatives along with providing advocacy support primarily to local government on behalf of the business community.
In recent years, the DBA has been a committed advocate for re-examining the approach to Downtown Governance. The Board has consistently maintained that the responsibility for funding downtown initiatives in such a socially charged environment should not rest solely with the business community.
Despite their efforts, the DBA recognized that the funds generated through the Business Improvement Area Levy were insufficient to effectively address the growing challenges of the current operating environment. This ongoing financial strain highlighted the need for a more equitable and sustainable
model to re-establish the downtown as a safe and welcoming heart of the city.
At the annual DBA budget presentation to City Hall, the DBA requested the essential funding needed to implement the Greater Downtown Governance Committee’s recommendations — work that the DBA is uniquely positioned to lead and has been delivering despite depleting resources for many years. The request was not approved. Instead, The City offered a one-time $100,000 Grant-in-Lieu, paired with a proposed 60% increase to the Business Improvement Area levy in 2026.
After careful analysis, the Board concluded that increasing the levy would place undue strain on already challenged businesses and compromise the DBA’s role as a trusted advocate. Operating with the reduced funding of $225,000 would require further staff reductions in an already under resourced environment and a significant reduction in programs, making it impossible to deliver the level of support that downtown businesses deserve and vitally need.
Beginning January 1, 2026, the City of Red Deer will become the primary contact point for matters previously supported by the DBA, including downtown support programs, business-district coordination, events, safety and cleanliness support, and stakeholder engagement. The DBA will work with City staff to support a smooth transition.
The DBA will continue to provide Clean Team services through the delivery of the City-funded environmental contract until February 1st, 2026.
Quote from CEO, Amanda Gould:
“To our business community, we have always operated with your best interests in our heart, continually driving the vision of a thriving downtown environment that serves every member of our community. The changes ahead will have a significant impact on downtown, as there will no longer be an organization dedicated to ensuring the downtown remains top-of-mind, leading events, marketing initiatives, or advocating on your behalf. It is likely you will experience less coordinated support and collective representation.
After 13 years of service to you and our beautiful downtown, it is with great personal sadness that we find ourselves here, but our message remains clear – addressing the unique challenges of our downtown should not rest solely on your shoulders. We cannot, in good faith, collect a levy that does not enable us to provide the essential services needed for our evolving downtown landscape”.
Quote from DBA Board Chair, Brandon Bouchard:
“The incredible staff at the Downtown Business Association have consistently delivered on their mandate with outstanding dedication and effectiveness. Through their efforts, they have successfully promoted the downtown area, organized impactful marketing and event initiatives, and provided steadfast
advocacy support for the business community. Their work has extended well beyond the legislated requirements, as they have proactively responded to the evolving needs of downtown businesses, adapting to challenges and supporting operations within a complex and changing environment.
Despite the staff’s relentless commitment to positioning the DBA as an effective leader for downtown interests, the absence of a sustainable funding model has made it impossible to continue delivering meaningful support. The Board cannot, in good conscience, propose a levy that does not enable the
Association to meet the required level of service, address the shifting priorities of the business community, or respond to the continually evolving needs of the downtown”.
From Community Futures Central Alberta
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